RRSPs can make retirement easier

Planning for retirement can be the last thing on a farmer’s mind.

The value of the farm and investments that have accumulated over the years quite often leaves little concern about the ability to fund one’s retirement.

However, discussions about succession planning or not selling off farm assets can complicate the issue.

Using a Registered Retirement Savings Plan to help fund retirement can alleviate these concerns without compromising the farm’s economic health .

RRSPs are a tax tool that allows farmers to build up a retirement fund while not having to pay tax on that money until it is used.

They make a contribution to their RRSP and receive a deduction from their taxable income for the same amount.

Farmers who eventually withdraw money from their RRSP accounts are then required to report it as income in the year it was withdrawn.

The tax deduction from making an RRSP contribution can be significant in Canada, where the personal tax system uses a marginal rate system. Under this system, RRSPs can become a useful tool for moving income from a high tax bracket to a lower one.

An example would be an Alberta farmer who pays the highest personal tax rate of 39 percent. If this farmer was to buy an RRSP and later use the funds during retirement when his income level is lower, he could reduce the taxes paid on that income up to 24 percent, depending on his income.

There are restrictions on how much a taxpayer can contribute to an RRSP. The limit is based on a percentage of the previous year’s income levels and is cumulative until fully used.

However, only earned income will increase a taxpayer’s contribution limit.

This means that most investment income, such as interest, dividends or capital gains, will not increase the limit.

Land rent and wages are examples of earned income that would increase a farmer’s contribution limit, which in turn could affect how he decides to be paid from the farm, especially if the farm is incorporated.

RRSPs can also allow farmers to withdraw a $25,000 tax free loan to buy a house if they have not personally owned a home for the last five years.

This can be a useful tool for anyone considering moving off the farm if their home quarter and house are owned by the farming corporation. The loan is interest free, and the farmer has 15 years to pay it back.

It is not uncommon to see a farm start the transition to the next generation only to realize the farm is not capable of sustaining the retirement of one generation and the operations of the next. RRSPs can help fund the retirement of one generation while still keeping the farm financially viable.

RRSPs are not ideal for every situation and care should be taken to ensure contributions are made appropriately.

Contact a professional to discuss the options and whether RRSPs are the right fit.

Shuyuan Li and Karl Hendrickson of KPMG assisted in the writing of this article.

Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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